Germany seems to be punching below its weight still. As if to pay the prize for its mercantilist economy, ever so biased towards exports and therefore making it overly dependent on other countries and their currencies, it bears the brunt of the present West-Eastern altercation as well as the sanction regime. At the same time Russia takes over the role of informal conservative leadership in Europe, a role no doubt, that would serve Germany so well. Sure, the Western sanctions against the Russian Federation and the conflict over the Ukraine are inextricably connected. The EU adopted them under relentless American pressure first and foremost as punishment for President Putin’s incorporation last year into Russia of Crimea. That is, even though this act could be justified by international provisions for the self-determination of ethnic minorities, all the more given the Western Kosovo precedent.
Against this the Western route of action has been taken regardless of a proper referendum, conducted on the 16th March 2014 in Crimea under the supervision of OSCE emissaries. It returned a vast majority in favour of re-joining their historical continuity with Russia rather than remaining in what looks increasingly as a failed state on the margin of Europe. This was one of the issues discussed at a forum for German industrial players in Russia, arranged by the “Eastern-Institute Wismar” in Berlin on the 3. July at the Council on Foreign Relations. Regarding the risk of failure in Ukraine Ricardo Giucci of the German consultancy to the Ukrainian government, prompted by some in the know, divulged details about the ongoing debt crisis in that country with immediate financial needs of at least forty billion dollars.
Meanwhile a new crisis is pending and set to pivot in December this year, when Ukrainian debt against Russia of about three billion dollars in eurobonds becomes due. Now a dispute has arisen whether this debt is private, as Ukraine officials claim, or owed to the state according to the Russian side. It will be up to the IMF, the International Monetary Fond, to make a decision quickly on this delicate issue. For if it is state lending, the IMF money transfers toward the Ukraine would be blocked instantly and bankruptcy would be looming again. In this context it is worth mentioning that the Ukraine is economically not important for Russia with exports thither worth only 6% of Russian output. Rather the issue for Russia is security first and the Russian minority in the Donetz Basin second, which is mostly Russian spoken. There are also important historical sensitivities involved here; for Hitler and Operation Barbarossa the holding of the Donetz Basin hag been absolutely crucial in terms of strategic resources for the war effort such as coal. The blood toll paid by the Russians within living memory for holding it, was considerable. It has been until recently a highly industrialized area, albeit meanwhile economic activity, once amounting to 15 % of Ukrainian GDP, has come to a standstill.
How effective are the Western Russia sanctions? The issues was of utmost concern at the forum in Berlin not least because of the fear of Russian retribution and the risks for German property and interests. It turns out that only 20% of the Russian economy is being touched by the Western sanctions. Speaker Frank Schauff, Moscow based CEO of the Association of European Businesses, reminded everyone that the effect of the sanction regime on the Russian economy is marginal in comparison to the really important things such as energy prizes, namely oil and gas. In 2014 Russian economic performance bottomed out at a negative GDP of -0,6 %. For 2015 growth of one percent is being expected.
German and European economic dependency on Russia remains surprisingly stable despite the sanction regime. Three thirds of German energy supply, namely gas and oil, still comes from Russia. According to data from the “Ost-Ausschuß der deutschen Wirtschaft” round about 300.000 German and two million European jobs depend on business with Russia. European companies have the largest share, roughly half of all foreign investment in Russia, mostly in energy firms, who are little affected by sanctions. However Christiane Schuchart, in charge at the “Ost-Ausschuß”, told the audience that in 2014 German trade with Russia dropped by half, or from about 40 to just over 20 billion dollars and exports to Russia declined by 80% in 2014. This would suggest that virtually the backfiring of the sanctions is felt much stronger back home than the pain in targeted Russia. Little wonder that nobody at the three highly qualified panels of the Berlin meeting was able to supply any data as to how much different European member states are hurt by the sanction regime. What most panellists agreed on though was that Germany is hurt most of all.
It is for this reason that signs of dissent and dissatisfaction with the extension of the European sanction regime until January 2016, is growing not only in Germany. So much so that recently a leading German newspaper on economic reporting did not hide its irritation if not disapproval of the russophile sentiments of corporate Germany. Nevertheless under the duress of ongoing East-Western tensions and the sanctions regime German Investments in Russia are frozen with few exceptions for large companies such as Bosch. Worse even, the German General Motors plant for Opel cars in St. Petersburg will be shut down shortly. Recent polls among German entrepreneurs return gloomy expectations. However there are also some sneaky aspects to this. For instance on the eve of this year’s St Petersburg Forum, also known as the eastern Davos, American officials personally called up German economic Big Whigs to talk them out of attending, admittedly with limited success. Nevertheless, as the Berlin audience learned, American companies such as General Electric attended and settled huge orders. This does not bode well for future compliance with the Western sanction regime.
It turns out as Hans Henning Schröder, head of a new Berlin think tank for Eastern relations, tells us: Putin did suffer least from conflict over Ukraine and the sanctions regime. Like nothing else seen in the recent past, the incorporation of the Crimea, served him very well in approval ratings. The domestic effects of the sanctions against Russia are less clear. Nevertheless it speaks for itself that Putin’s approval rating has reached an all time high of 89 % recently. Schröder portraits the Russian President as an apt mediator, a true moderate intellectual, who for quite somee time has been the most able leader by keeping different parties of the Russian elite, pro-Western versus Slavophile or Keynesian versus Monetarist, at bay. Putin wonderously makes them talking to each other and thus prevents any disintegration of his hegemonic rule – or as Professor Schröder put it: ever so much authoritarian but not overtly repressive. While this depiction fits in with the Western context of an anti-authoritarian and permissive mindset it is certainly less shared throughout Asia. At present the Eastern leaning populace in Russia comes in at 70% versus 30% of a pro-Western orientation. Surely the sanctions play an important part in this shift. The recent extension is likely to push the balance of opinions ever further against the West.
As the audience also learned in Berlin, the conditions for doing business in Russia have improved greatly in the last decade. Falk Tischendorf, partner with the Moskau based lawyers group Beiten & Burkhardt, argued that while Russia presently holds position 62, compared to 14 for Germany, in the average index for doing business, it advances to a comfortable 13 in the most important index for enforcing contracts. Which is one of the reasons why German companies are not retreating from Russia but remain in a stand-by position: de-leveraging and hybernating until more peaceful conditions return.
However there is one other problem with doing business in Russia. The international lawyer from Hamburg, Hans Janus, reported about so called “black raider” incidents, attacks on foreign business presumably by native competitors. Janus cautioned however against overrated estimates, like the 70.000 incidents per year reported in one American study. The issue of Western investors being bullied out from joint ventures, once they are successful, is certainly a risk. However the Russian judiciary seems to provide sufficient protection for Westerners eager to protect or recover their property. Janus backed this up with the fact that until today not one single case has surfaced from businesses in Russia where resort to guaranties by the German government had to be utilized.